Social Security benefits for divorced spouses remains one of the few fertile areas where strategic claiming strategies can make a big difference in retirement income planning — depending on the ex-spouses' ages. I encountered many questions on this important topic when I addressed the Association of Divorce Financial Planners' annual conference in Las Vegas in October.
As a result of the Bipartisan Budget Act of 2015, there are now two sets of rules that apply to claiming strategies for divorced spouses. But before I dive into what is new, let me review the basic rules of how a divorced spouse qualifies for Social Security benefits.
As long as an individual was married at least 10 years, was divorced and is currently single, he or she can collect Social Security benefits on an ex-spouse's earning record as if they were still married — even if the former spouse has remarried.
In addition, as long as the couple has been divorced at least two years, an ex-spouse is “independently entitled” to claim benefits on a former spouse's earnings record even if the ex-spouse has not yet claimed benefits. However, in order to be independently entitled to benefits, both ex-spouses must be at least 62 years old.
In some cases, an ex-spouse can file a restricted claim for spousal benefits only, allowing him or her to collect spousal benefits — worth half of the ex-spouse's full retirement age benefit amount — while their own retirement benefit continues to grow by 8% per year up until age 70. That is where the new rules kick in.
Now, only those people who were born on or before Jan. 1, 1954, are eligible to restrict their claim to spousal benefits when they turn 66 and allow their own retirement benefits to grow up until age 70. Ex-spouses who are still eligible to choose which benefit to claim can each file a restricted claim for spousal benefits on the other's earnings record at 66. Married couples can't do that. Only one spouse in a marriage can claim spousal benefits.
But younger married and divorced spouses will never have the option of choosing which benefit to claim because of the new rules. People born on or after Jan. 2, 1954, will be deemed to file for all available benefits — both spousal and their own retirement benefit — when they claim Social Security, and will be paid the higher of the two benefits.
However, the deemed filing rule does not apply to survivor benefits. So if a divorced spouse had not yet claimed Social Security and her ex-husband died, she could claim survivor benefits first and switch to her own maximum retirement benefits at 70. Or, depending on her age at the time of his death, she might be able to claim her own reduced retirement benefits first and switch to unreduced survivor benefits at her full retirement age.
Claiming strategies can be challenging when ex-spouses' birthdays fall on either side of the Jan. 1, 1954, demarcation line.
One financial adviser I met in Las Vegas asked me to recommend a Social Security claiming strategy for a divorced couple where the ex-husband is the higher earner but is five-years younger than his ex-wife. The ex-wife, currently 64 years old, was born in 1952. The ex-husband, now 59, was born in 1957 and has since remarried.
“I think it makes sense for you to file a restricted application for spousal benefits on your ex's earnings record when you turn 67 and he is 62,” I told her. “That will allow you to collect half of his full retirement age amount while your own benefit earns delayed retirement credits of 8% per year. At 70, you can file for your own larger benefit.”
But her ex-husband will not have the same options for two reasons: He was born after Jan. 1, 1954, and he has remarried. His only option is to claim his own Social Security retirement benefit. Although I don't know the details of his current marriage, he may want to wait until 70 to claim his maximum retirement benefit, which will also translate into a maximum survivor benefit for both his current wife and his ex-wife. They are both entitled to full survivor benefits depending on their age at the time of claim.
There is one more rule change to keep in mind for divorced clients. Under the new rules, a worker who claims reduced Social Security benefits early can still suspend benefits at full retirement age in order to earn delayed retirement credits. Normally that means any auxiliary benefits for a spouse or eligible minor dependent child or permanently disabled child would also stop during the suspension. But suspending benefits does not affect the benefits of an ex-spouse.
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Mary Beth Franklin is a contributing editor to Mopedia and a certified financial planner.